by Paul H. Kupiec
American Enterprise Institute
July 17, 2014
The Dodd-Frank Act (DFA) does not define systemic risk, and this ambiguity allows regulators wide discretion to interpret new DFA powers. When designating non-bank financial firms, DFA criteria are unclear. Because DFA assigns regulators with the (impossible) task of ensuring financial stability, but does not limit regulators’ ability to slow economic growth by over-regulating the financial system, DFA builds in a bias toward over-regulation of the financial system. To make matters worse, DFA does fix the “too-big-to-fail” problem. In many cases, keeping subsidiaries open and operating will require the extension of government guarantees that are far larger than those that would be provided under a bankruptcy proceeding and Federal Deposit Insurance Act (FDIA) resolution. Improvements in the FDIA resolution process can be a substitute for mandatory enhanced supervision and prudential standards that apply to many institutions that exceed the Section 165 size threshold.

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